by Carrie Reeder
You have probably received refinancing offers in the mail or advertised
online touting your ability to pull out your home's equity. But a 2nd mortgage,
also called an equity loan, may be a better financing option than refinancing
your mortgage. 2nd mortgages are ideal when you just want to tap into your
equity, plan to move soon, or are unsure about the amount you want to borrow.
Tapping Your Equity
Tapping into your home's equity is best done through a 2nd mortgage if
you already have a low interest loan. Typically, applying for a 2nd mortgage
requires fewer fees than refinancing a mortgage. 2nd mortgages are also paid
back sooner, so your interest payments are less.
With the costs involved in refinancing, you typically need to keep the
loan for about two years to break even. However, with a 2nd mortgage you don't
have those fees to worry about recovering. 2nd mortgages do have minimum balance
and early pay off fees, but they are significantly less than refinancing fees.
Flexible Loan Amount
A 2nd mortgage allows you to take out your home's equity over the course
of several years. The money can be accessed with a check, ATM card, or direct
deposit, depending on how you set up your account with the lender. Additionally,
you only pay interest on the money that you have withdrawn.
Lenders tend to be more lenient with approving 2nd mortgages. Since the
amount usually is less than a traditional loan, lenders remain confident that
they will receive payment. If you have had a few credit glitches in the past two
years, think about going with a 2nd mortgage.
2nd Mortgage Mistakes
2nd mortgages aren't for everyone. You should weigh the cost of PMI and
payments when choosing your financing options. Borrowing more than 80% of your
home's value will subject you to private mortgage insurance.
Your monthly payments should also be a factor in your decision. By taking
out equity when refinancing your home, you will have a lower payment than if you
had both a mortgage and 2nd mortgage payment. Also, if you refinance in the
future, you will have to pay off your 2nd mortgage.
Carrie Reeder is the owner
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